Skip to main content
×
×
Home

The CEO Horizon Problem and Managerial Slack in China

  • Junxiong Fang (a1), Lerong He (a2) (a3) and Martin J. Conyon (a4)
Abstract

This study investigates how CEO behavior and incentives change during the CEO's final years in office, known as the horizon problem. We examine how the horizon problem alters managerial slack, a measure of operational inefficiency and managerial value diversion. Using data on Chinese publicly traded firms between 2003 and 2011, we find that managerial slack increases in the last two years of CEO tenure compared to earlier years. We also show that the increase in managerial slack in CEO final years in office is smaller in privately controlled firms than in state-owned enterprises, smaller in firms with CEO equity ownership and more independent boards compared to those without. We conclude that higher quality corporate governance mechanisms ameliorate the perverse incentives associated with the CEO horizon problem, and reduce CEOs’ tendency to increase managerial slack during their final years in office.

摘要:

本文考察CEO任职期限效应, 即CEO离职前的行为和动机变化。具体而言, 本文研究CEO任职期限问题对企业组织冗余和管理者侵占挪用公司资产的影响。基于2003-2011年中国上市公司的样本, 本研究发现, 相比以前年份, CEO离职前最后两年的组织冗余显著更高。进一步研究表明, CEO任职期限效应对组织冗余的影响在民营上市公司, 以及董事会独立性高和管理层持股的企业中较弱。综上所述, 本文指出良好的公司治理机制有助于缓解CEO任职期限效应所导致的委托代理问题, 从而减轻CEO在临近离职时为满足自身利益通过浪费或挪用公司资产而导致组织冗余增加的现象。

यह शोध अध्ययन यह अनुसंधान करता है कि किस प्रकार कॉर्पोरेट मुख्य अधिशासी के अंतिम दिनों में उनके व्यवहार और प्रोत्साहन में परिवर्तन होता है, जिसको दिग्मंडलीय चुनौती कहा जाता है. हमने यह परीक्षण किया है कि किस प्रकार दिग्मंडलीय चुनौती प्रबंधकीय शिथिलता को बदलती है, जो की परिचालन क्षमता सम्बद्ध प्रबंधकीय मूल्य विपथन के मानक हैं. चीन की सार्वजनिक सूचीबद्ध कंपनियों का 2003 से 2011 के बीच के आंकड़ों के आधार पर हमने यह पाया की आरम्भिक वर्षों की तुलना में प्रबंधकीय शिथिलता अंतिम दो वर्षों में बढ़ जाती है. साथ ही हमने यह पाया की ऑफिस के अंतिम दो वर्षों की प्रबंधकीय शिथिलता निजी स्वामित्व वाली फर्मों में राजकीय स्वामित्व वाली फर्मों की तुलना में कम होती है. प्रबंधकीय शिथिलता मुख्य अधिशासी के इक्विटी स्वामित्व व बोर्ड की स्वतंत्रता से इस से इतर परिस्थितियों वाली फर्मों से कम होती है. हमारा यह निष्कर्ष है की उच्च स्तरीय कॉर्पोरेट प्रशासन तंत्र मुख्य अधिशासी सम्बद्ध दिग्मंडलीय चुनौती से जुड़े विकृत प्रोत्साहन को सुधारता है और साथ ही मुख्य अधिशासी के ऑफिस के अंतिम वर्षों में प्रबंधकीय शिथिलता बढ़ने की प्रवृत्ति को कम करता है.

RESUMO:

Este estudo investiga como o comportamento e os incentivos dos CEOs mudam durante os anos finais do cargo de CEO, conhecido como o problema do horizonte.

Examinamos como o problema do horizonte altera a folga gerencial, uma medida de ineficiência operacional e desvio de valor gerencial. Usando dados sobre empresas chinesas de capital aberto entre 2003 e 2011, constatamos que a folga gerencial aumentou nos últimos dois anos de gestão do CEO em comparação com anos anteriores. Além disso, constatamos que o aumento da folga gerencial nos anos finais de gestão do CEO é menor em empresas de controle privado do que em empresas estatais, menor em empresas com participação acionária do CEO e com conselhos independentes em comparação com aqueles que não possuem. Concluímos que mecanismos de governança corporativa de melhor qualidade diminuem os incentivos perversos associados ao problema do horizonte de CEO e reduzem a tendência dos CEOs de aumentar a folga gerencial durante seus últimos anos no cargo. Nossa conclusão indica que mecanismos de governança corporativa de melhor qualidade diminuem os incentivos perversos associados ao problema do horizonte do CEO e reduzem a tendência dos CEOs de aumentar a folga gerencial durante seus últimos anos no cargo.

АННОТАЦИЯ:

В данной работе исследуется, каким образом поведение и мотивы генерального директора меняются в течение последних лет его работы, – явление, известное как проблема горизонта. Мы изучаем, как проблема горизонта влияет на управленческую слабость, т.е. меру оперативной неэффективности и снижения управленческой пользы. На основании данных из китайских публичных компаний в период с 2003 по 2011 годов, мы обнаруживаем, что управленческая слабость возрастает в последние два года работы на посту генерального директора по сравнению с предыдущими годами. Кроме того, мы устанавливаем, что увеличение управленческой слабости в последние годы работы на позиции генерального директора менее значительно в частных компаниях, чем на государственных предприятиях; а также в компаниях с долей собственности у генерального директора и с более независимыми советами директоров по сравнению с теми компаниями, где нет ни того, ни другого. Мы делаем вывод о том, что более качественные механизмы корпоративного управления смягчают нежелательные мотивы, связанные с проблемой горизонта у генерального директора, и уменьшают склонность руководителей к увеличению управленческой слабости в течение последних лет их работы.

КЛЮЧЕВЫЕ СЛОВА: сменяемость генеральных директоров, Китай, корпоративное управление, проблема горизонта, слабость

RESUMEN:

Este estudio investiga cómo cambian el comportamiento del CEO y los incentivos durante los últimos años del CEO en el cargo, conocido como el problema del horizonte. Examinamos cómo el problema el horizonte altera la holgazanería gerencial, una medida de ineficiencia operacional y desviación del valor gerencial. Utilizando datos de empresas chinas listadas en bolsa entre el 2003 y el 2011, encontramos que la holgazanería gerencial aumenta en los dos últimos años de la tenencia del cargo como CEO en comparación con los años anteriores. Además. Encontramos que el aumento en la holgazanería gerencial del CEO en los últimos años en el cargo es menor en empresas de capital privado que en empresas de propiedad del estado, en las empresas pequeñas en donde el CEO tiene capital accionario y en empresas con juntas más independientes en comparación con las que no lo tienen. Concluimos que los mecanismos de gobierno corporativo de mayor calidad mejoran los incentivos perversos asociados con el problema del horizonte del CEO, y reduce la tendencia del CEO a aumentar la holgazanería gerencial durante los últimos años en la posición.

  • View HTML
    • Send article to Kindle

      To send this article to your Kindle, first ensure no-reply@cambridge.org is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about sending to your Kindle. Find out more about sending to your Kindle.

      Note you can select to send to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be sent to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

      Find out more about the Kindle Personal Document Service.

      The CEO Horizon Problem and Managerial Slack in China
      Available formats
      ×
      Send article to Dropbox

      To send this article to your Dropbox account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your <service> account. Find out more about sending content to Dropbox.

      The CEO Horizon Problem and Managerial Slack in China
      Available formats
      ×
      Send article to Google Drive

      To send this article to your Google Drive account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your <service> account. Find out more about sending content to Google Drive.

      The CEO Horizon Problem and Managerial Slack in China
      Available formats
      ×
Copyright
Corresponding author
Corresponding author: Lerong He (lhe@brockport.edu)
References
Hide All
Adithipyangkul, P., Alon, I., & Zhang, T. 2011. Executive perks: Compensation and corporate performance in China. Asia Pacific Journal of Management, 28 (2): 401425.
Anderson, M., Banker, R., Huang, R., & Janakiraman, S. 2007. Cost behavior and fundamental analysis of SG&A costs. Journal of Accounting, Auditing, and Finance, 22 (1): 128.
Antia, M., Pantzalis, C., & Park, J. C. 2010. CEO decision horizon and firm performance: An empirical investigation. Journal of Corporate Finance, 16 (3): 288301.
Banker, R., Huang, R., & Natarajan, R. 2011. Equity incentives and long-term value created by SG&A expenditure. Contemporary Accounting Research, 28 (3): 794830.
Barker, V. L. III., & Mueller, G. 2002. CEO characteristics and firm R&D spending. Management Science, 48 (6): 782801.
Bebchuk, L., & Jolls, C. 1999. Managerial value diversion and shareholder wealth. Journal of Law, Economics, and Organization, 15 (2): 487502.
Bebchuk, L., & Stole, L. 1993. Do short-term objectives lead to under- or over-investment in long term projects. Journal of Finance, 48 (2): 719729.
Boyd, B. 1994. Board control and CEO compensation. Strategic Management Journal, 15 (5): 335344.
Brickley, J., Linck, J., & Coles, J. 1999. What happens to CEOs after they retire? New evidence on career concerns, horizon problems, and CEO incentives. Journal of Financial Economics, 52 (3): 341377.
Cai, D., Luo, J., & Wan, D. 2012. Family CEOs: Do they benefit firm performance in China? Asia Pacific Journal of Management, 29 (4): 923947.
Cai, H., Fang, H., & Xu, L. 2011. Eat, drink, firms, government: An investigation of corruption from the entertainment and travel costs of Chinese firms. Journal of Law and Economics, 54 (1): 5578.
Casamatta, C., & Guembel, A. 2010. Managerial legacies, entrenchment, and strategic inertia. Journal of Finance, 65 (6): 24032436.
Chang, E., & Wong, S. 2009. Governance with multiple objectives: Evidence from top executive turnover in China. Journal of Corporate Finance, 15 (2): 230244.
Chen, D., Li, O., & Liang, S. 2016. Perk consumption as a suboptimal outcome under pay regulations. Asia-Pacific Journal of Accounting and Economics, 23 (4): 373399.
Chen, J., Cumming, D., Hou, W., & Lee, E. 2016. CEO accountability for corporate fraud: Evidence from the split share structure reform in China. Journal of Business Ethics, 138 (4): 787806.
Chen, X., Lu, H., & Sougiannis, T. 2012.The agency problem, corporate governance, and the asymmetrical behavior of selling, general, and administrative costs. Contemporary Accounting Research, 29 (1): 252282.
Cheng, J., & Kesner, I. 1997. Organizational slack and response to environmental shifts: The impact of resource allocation patterns. Journal of Management, 23 (1): 118.
Conyon, M., & Florou, A. 2006. The pattern of investment surrounding CEO retirements: UK evidence. British Accounting Review, 38 (3): 299319.
Conyon, M., & He, L. 2011. Executive compensation and corporate governance in China. Journal of Corporate Finance, 17 (4): 11581175.
Conyon, M., & He, L. 2012. CEO pay and corporate governance in China. Corporate Governance: An International Review, 20 (6): 575592.
Conyon, M., & He, L. 2016. Executive compensation and corporate fraud in China. Journal of Business Ethics, 134 (4): 669691.
Cyert, R., & March, J. 1963. A behavioral theory of the firm. Englewood Cliffs, NJ: Prentice-Hall.
Dalton, D., Daily, C., Ellstrand, A., & Johnson, J. 1998. Meta-analytic reviews of board composition, leadership structure, and financial performance. Strategic Management Journal, 19 (3): 269290.
Davis, G. 2005. New directions in corporate governance. Annual Review of Sociology, 31 (1): 143162.
Dechow, P., & Sloan, R. 1991. Executive incentives and the horizon problem: An empirical investigation. Journal of Accounting and Economics, 14 (1): 5189.
DeFond, M. L., Wong, T. J., & Li, S. 2000. The impact of improved auditor independence on audit market concentration in China. Journal of Accounting and Economics, 28 (3): 269305.
Delios, A., Wu, Z. J., & Zhou, N. 2006. A new perspective on ownership identities in China's listed companies. Management and Organization Review, 2 (3): 319343.
Ding, Y., Zhang, H., & Zhang, J. 2007. Private vs. state ownership and earnings management: Evidence from Chinese listed companies. Corporate Governance: An International Review, 15 (2): 223238.
Fama, E. 1980. Agency problems and the theory of the firm. Journal of Political Economy, 88 (2): 288307.
Fan, G., Wang, X., & Zhu, H. 2011. NERI index of marketization of China's provinces: 2011 report. Beijing, Economic Science Press.
Feng, M., Li, C., & McVay, S. 2009. Internal control and management guidance. Journal of Accounting and Economics, 48 (2–3): 190209.
Ferris, S., Kim, K., & Noronha, G. 2009. The effect of crosslisting on corporate governance: A review of the international evidence. Corporate Governance: An International Review, 17 (3): 338352.
Finkelstein, S., Hambrick, D. C., & Cannella, A. 2009. Strategic leadership: Theory and research on executives, top management teams, and boards. New York: Oxford University Press.
Firth, M., Fung, P., & Rui, O. 2006. Firm performance, governance structure, and top management turnover in a transitional economy. Journal of Management Studies, 43 (6): 12891330.
Firth, M., Fung, P., & Rui, O. 2007. How ownership and corporate governance influence chief executive pay in China's listed firms. Journal of Business Research, 60 (7): 776785.
Firth, M., Wong, S., & Xin, Q. 2016. Regulatory sanctions on independent directors and their consequences to the director labor market: Evidence from China. Journal of Business Ethics, 134 (4): 693708.
Gibbons, R., & Murphy, K. 1992. Optimal incentive contracts in the presence of career concerns: Theories and evidence. Journal of Political Economy, 100 (3): 468506.
Grinstein, Y., Weinbaum, D., & Yehuda, N. 2017. The economic consequences of perk disclosure. Contemporary Accounting Research, DOI: 10.1111/1911-3846.12343.
Gul, F., Cheng, L., & Leung, T. 2011. Perks and the informativeness of stock prices in the Chinese market. Journal of Corporate Finance, 17 (5): 14101429.
Hambrick, D. C., & Mason, P. 1984. Upper echelons: The organization as a reflection of its top managers. Academy of Management Review, 9 (2): 193206.
Hart, O. 1983. The market mechanism as an incentive scheme. Bell Journal of Economics, 14 (2): 366382.
Haveman, H. A., & Wang, Y. 2013. Going (more) public: Institutional isomorphism and ownership reform among Chinese firms. Management and Organization Review, 9 (1): 1751.
He, L., & Fang, J. 2016. CEO overpayment and dismissal: The role of attribution and attention. Corporate Governance: An International Review, 24 (1): 2441.
He, L., Shaw, T., & Fang, J. 2017. Managerial labor market during institutional transition: A study of CEO underpayment and voluntary turnover. Corporate Governance: An International Review, 25 (3): 167185.
Hermalin, B. E., 1992. The effects of competition on executive behavior. Rand Journal of Economics, 23 (3): 350365.
Hermalin, B. E., & Weisbach, M. S. 1988. The determinants of board composition. Rand Journal of Economics, 19 (4): 589606.
Huson, M. R., Tian, Y., Wiedman, C., & Wier, H. 2012. Compensation committees’ treatment of earnings components in CEOs’ terminal years. The Accounting Review, 87 (1): 231259.
Jensen, M. 1986. Agency costs of free cash flow, corporate finance, and takeovers. American Economic Review, 76 (2): 323329.
Jensen, M. 1993. The modern industrial revolution, exit and the failure of internal control systems. Journal of Finance, 48 (3): 831880.
Jensen, M., & Meckling, W. 1976. Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3 (4): 305360.
Jensen, M., & Murphy, K. J. 1990. Performance pay and top-management incentives. Journal of Political Economy, 98 (2): 225264.
Jensen, M., & Warner, J. B. 1988. The distribution of power among corporate managers, shareholders, and directors. Journal of Financial Economics, 20 (1–2): 324.
Ju, M., & Zhao, H. 2009. Behind organizational slack and firm performance in China: The moderating roles of ownership and competitive intensity. Asia Pacific Journal of Management, 26 (4): 701717.
Kahneman, D., & Tversky, A. 1979. Prospect theory: Analysis of decision under risk. Econometrica, 47 (2): 263291.
Kato, T., & Long, C. 2006. Executive turnover and firm performance in China. American Economic Review, 96 (2): 363367.
Kornai, J., Maskin, E., & Roland, G. 2003. Understanding the soft budget constraint. Journal of Economic Literature, 41 (4): 10951136.
Krause, R., & Semadeni, M. 2014. Last dance or second chance? Firm performance, CEO career horizon, and the separation of board leadership roles. Strategic Management Journal, 35 (6): 808825.
Laverty, K. 1996. Economic ‘short-termism’: The debate, the unresolved issues, and the implications for management practice and research. Academy of Management Review, 21 (3): 825860.
Li, S., Xia, J., Long, C., & Tan, J. 2012. Control modes and outcomes of transformed state owned enterprises in China: An empirical test. Management and Organization Review, 8 (2): 283309.
Lott, J. R. Jr. 1990. Attendance rates, political shirking, and the effect of post-elective office employment. Economic Inquiry, 28 (1): 133150.
Luo, W., Zhang, Y., & Zhu, N. 2011. Bank ownership and executive perquisites: New evidence from an emerging market. Journal of Corporate Finance, 17: 352–270.
March, J., & Simon, H. 1958. Organizations. New York: Wiley.
Martin, G., Wiseman, R., & Gomez-Mejia, L. 2016. Going short-term or long-term? CEO stock options and temporal orientation in the presence of slack. Strategic Management Journal, 37 (12): 24632480.
Matejka, M., Merchant, K., & Stede, W. 2009. Employment horizon and the choice of performance measures: Empirical evidence from annual bonus plans of loss-making entities. Management Science, 55 (6): 890905.
Matta, E., & Beamish, P. 2008. The accentuated CEO career horizon problem: Evidence from international acquisitions. Strategic Management Journal, 29 (7): 683700.
McClelland, P. L., Barker, V. III, & Oh, W. 2012. CEO career horizon and tenure: Future performance implications under different contingencies. Journal of Business Research, 65: 13871393.
McClelland, P. L., Liang, X., Barker, V. III. 2010. CEO commitment to the status quo: replication and extension using content analysis. Journal of Management, 36 (5): 12511277.
Miller, 2002. Knowledge inventories and managerial myopia. Strategic Management Journal, 29 (3): 273292.
Meyer, K. 2015. Context in management research in emerging economies. Management and Organization Review, 11 (3): 369377.
Murphy, K. J., & Zimmerman, J. L. 1993. Financial performance surrounding CEO turnover. Journal of Accounting and Economics, 16 (1–3): 273315.
Narayanan, M. P. 1987. Managerial incentives for short-term results: A reply. Journal of Finance, 42 (4): 11031104.
Peng, M. 2003. Institutional transitions and strategic choices. Academy of Management Review, 28 (2): 275296.
Peng, M., Li, Y., Xie, E., & Su, Z. 2010. CEO duality, organizational slack, and firm performance in China. Asia Pacific Journal of Management, 27 (4): 611624.
Reilly, G., Souder, D., & Ranucci, R. 2016. Time horizon of investments in the resource allocation process: Review and framework for next steps. Journal of Management, 42 (5): 11691194.
Scharfstein, D. 1988. Product–market competition and organizational slack. Rand Journal of Economics, 19 (1): 147155.
Shen, W., & Lin, C. 2009. Firm profitability, state ownership, and top management turnover at the listed firms in China: A behavioral perspective. Corporate Governance: An International Review, 17 (4): 443456.
Shen, W., Zhou, Q., & Lau, C. 2016. Empirical research on corporate governance in China: A review and new directions for the future. Management and Organization Review, 12 (1): 4173.
Shleifer, A., & Vishny, R. 1997. A survey of corporate governance. Journal of Finance, 52 (2): 737–77.
Singh, J. 1986. Performance, slack, and risk taking in organizational decision making. Academy of Management Journal, 29 (3): 562585.
Souder, D., & Shaver, M. 2010. Constraints and incentives for making long horizon corporate investments. Strategic Management Journal, 31 (12): 13161336.
Stan, C., Peng, M., & Bruton, G. 2014. Slack and the performance of state-owned enterprises. Asia Pacific Journal of Management, 31 (2): 473495.
Su, Y. Y., Xu, D., & Phan, P. H. 2008. Principal-principal conflict in the governance of the Chinese public corporation. Management and Organization Review, 4 (1): 1738.
Su, Z., Xie, E., & Li, Y. 2009. Organizational slack and firm performance during institutional transition. Asia Pacific Journal of Management, 26 (1): 7591.
Tan, J., & Peng, M. 2003. Organizational slack and firm performance during economic transitions: Two studies from an emerging economy. Strategic Management Journal, 24 (13): 12491263.
Weisbach, M. S. 1988. Outside directors and CEO turnover. Journal of Financial Economics, 20: 431460.
Williamson, O. 1964. The economics of discretionary behavior: Managerial objectives in a theory of the firm. Englewood Cliffs, N. J.: Prentice-Hall.
Williamson, O. 1991. Economic institutions: Spontaneous and intentional governance. Journal of Law, Economics, and Organization, 7: 159187.
Wooldridge, J. M. 2010. Econometric analysis of cross section and panel data. Cambridge, MA: MIT Press.
Wright, M., Filatotchev, I., Hoskisson, R. E., & Peng, M. W. 2005. Strategy research in emerging economies: Challenging the conventional wisdom. Journal of Management Studies, 42 (1):133.
Xu, C., & Yan, M. 2014. Radical or incremental innovations: R&D investment around CEO retirement. Journal of Accounting, Auditing, and Finance, 29 (4): 547576.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Management and Organization Review
  • ISSN: 1740-8776
  • EISSN: 1740-8784
  • URL: /core/journals/management-and-organization-review
Please enter your name
Please enter a valid email address
Who would you like to send this to? *
×

Keywords

Metrics

Full text views

Total number of HTML views: 10
Total number of PDF views: 68 *
Loading metrics...

Abstract views

Total abstract views: 175 *
Loading metrics...

* Views captured on Cambridge Core between 24th May 2018 - 15th August 2018. This data will be updated every 24 hours.